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Using an appropriate diagram, explain who gains and who loses from the introduction of a tariff January 20, 2011

Posted by Avu in Section 4.
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1. Demands of the Question: Being a Paper 2 question, I do not have to do any evaluation. I have to use a diagram to illustrate the winners and losers of the introduction of a tariff. Along with this, I need to define tariff, and specify the stakeholders who will be effected by the tariff. I will then need to use the diagram to illustrate why those stakeholders gain or lose from the tariff’s imposition.

2. Definition: A tariff is a tax on imports used in order to reduce import quantity and increase domestic quantity. It results in a higher price and lower quantity.

3. Triple A: A tariff is a tax on imports, which can either be specific (so much per unit of sale) or ad valorem (a percentage of the price of the product). Tariffs reduce supply and raise the price of imports. This gives domestic equivalents a comparative advantage. As such, tariffs are distorting the market forces and may prevent consumers from gaining the benefit of all the advantages of international specialization and trade. The tariff has the effect of shifting the world supply curve vertically upwards by the amount of the tariff. The level of imports will fall from QaQd to QbQc. The government will also raise revenue, shown by the blue shaded area. The level of domestic production will increase from 0Qa to 0Qb.

4. Bullet Points:

  • Tariff is a tax on imports
  • Tax can be specific or ad valorem
  • Reduce supply and raise price
  • Domestic suppliers get comparative advantage of exporters
  • Distort market forces and reduce consumer benefit
  • Effectively shifts world supply up

5. PowerPoint Slides

6. Diagrams

7. Evaluation Suggestions: Don’t evaluate.

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